Identifying the Terms

Indeed, judicial opinions stating and applying this rule can be confusing, and the treatises often are little better. There is one major reason for this— a failure to distinguish the parol evidence rule from the plain meaning and four corners rules.2 The parol evidence rule governs the identification of a contract’s terms when there is a writing.3 It does nothing else. In particular, contrary to the views of some, the parol evidence rule is not the rule that excludes parol evidence whenever such evidence is excluded. The exclusion is a function of the four corners rule, which has this evidentiary function and may come into play before a court can apply either the parol evidence or the plain meaning rules.

§ 3.1.1. Statement of the Rule

The most widely endorsed version of the common law parol evidence rule may be stated in two parts as follows, synthesizing the authorities read for this study: (1) When an enforceable, written agreement is the final and complete expression of the parties’ agreement, prior oral and written agreements and contemporaneous oral agreements (together, “parol agreements”)4 concerning the same subject as the writing do not establish contract terms when the parol agreement contradicts or adds to the terms of the writing; (2) in addition, when an enforceable, written agreement is the final, but not the complete, expression of the parties’ agreement, a parol agreement may add to, but may not contradict, the written terms.5 This doctrinal statement, as far as it goes, is a matter of wide consensus.6 It hides, however, many complications.7

2 See §§.3.1.1; 4.2.1; 4.2.4.

3See generally Mullinnex LLC v. HKB Royalty Trust, 126 P.3d 909, 920 (Wyo. 2006); Casa Herrera, Inc. v. Beydoun, 83 P.3d 497, 503 (Cal. 2004); Alstom Power, Inc. v. BalckeDurr, Inc., 849 A.2d 804, 811 (Conn. 2004); Charles A. Burton, Inc. v. Durkee, 109 N.E.2d 265, 270 (Ohio 1952); 2 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 7.2 (3d ed. 2004); JOSEPH M. PERILLO, CALAMARI AND PERILLO ON CONTRACTS § 3.2 (5th ed. 2003); Scott J. Burnham, The Parol Evidence Rule: Don’t be Afraid of the Dark, 55

MONT. L. REV. 93, 109–20 (1994).

4 But see UCC § 2-202 (2001) (not including contemporaneous written agreements).

5See, e.g., Mullinnex, 126 P.3d at 920; RESTATEMENT (SECOND) OF CONTRACTS § 213 (1981); RESTATEMENT (FIRST) OF CONTRACTS § 237 (1932); 2 FARNSWORTH, supra note

2, at § 7.3.

6See RESTATEMENT (FIRST) OF CONTRACTS §§ 237 et seq.(1932); RESTATEMENT (SECOND) OF CONTRACTS §§ 209 et seq. (1981).

7See generally John D. Calamari & Joseph M. Perillo, A Plea for a Uniform Parol Evidence Rule and Principles of Contract Interpretation, 42 IND. L.J. 333 (1967).

To elaborate on the statement, the rule applies when the parties conclude a final, or a final and complete, written contract.8 When the contract is final but not complete, it sometimes is called a partially integrated agreement. When the contract is both final and complete, it sometimes is called a completely integrated agreement. Often, however, the courts write simply and less precisely of an integrated agreement. When the parties conclude an integrated agreement, they normally intend it to supersede parol agreements within its scope. That is, they integrate or merge parol agreements into the writing. The writing supplants them and becomes the sole repository of the contract’s terms as of the time of contract formation.9

When it applies, accordingly, the rule discharges (renders ineffective and inoperative) some parol agreements that contradict or add to an integrated agreement’s written terms, as the case may be. It, therefore, is a substantive rule of law, not a rule of evidence.10 That is, it determines that the terms of an agreement are those in the written document and denies operative effect to parol agreements that are contradictory or additional to the integration. This is true whether or not evidence of the parol agreement has probative value or is prejudicial.11 When offered to establish contract terms, the rule precludes the introduction of evidence of even relevant, probative, and non-prejudicial parol agreements, no matter what kind of evidence is involved. A rule of evidence, by contrast, typically forbids one kind of evidence—say, hearsay testimony—because it is thought to be unreliable or prejudicial. Evidence law, however, may allow proof of the same fact by another kind of evidence—say, a document. A consequence of the parol evidence rule is that, when the rule applies, evidence of a parol agreement is irrelevant when offered to establish an agreement’s terms.12 The rule itself, however, renders parol agreements inoperative: The terms of such agreements do not ground contract rights, duties, or powers.

10Id. at 502; Abercrombie v. Hayden Corp., 883 P.2d 845, 850 (Or. 1994); 9 JOHN HENRY WIGMORE, EVIDENCE IN TRIALS AT COMMON LAW § 2400 (Chadbourn rev. 1981) (1898); Thayer, supra note 1.

11But see Masterson v. Sine, 436 P.2d 561, 564 (Cal. 1968) (basing application of the parol evidence rule on the credibility of the evidence).

12Alstom Power, 849 A.2d at 811).

To avoid unnecessary confusion, note at the outset several points about the parol evidence rule. First, the predicate of the rule is that a written contract is integrated. The consequence of the rule precludes giving legally operative effect to parol agreements; put otherwise and less precisely, the rule discharges parol agreements.13 Accordingly, simply put, the parol evidence rule says only that, when a contract is integrated, parol agreements are not operative. In many jurisdictions, a four corners rule comes into play in deciding whether a written contract is integrated. Thus, the four corners rule determines the relevant elements of interpretation in deciding whether the predicate of the parol evidence rule is satisfied. The parol evidence rule itself does not determine what elements a court may consider when deciding the question of integration. Therefore, the four corners rule is not the same as the parol evidence rule. Further, the parol evidence rule does not preclude the admission of parol evidence for purposes other than establishing contract terms, such as determining whether a contract is integrated or ambiguous, or for resolving an ambiguity.14

Second, it is often said that there are several exceptions to the parol evidence rule.15 Examples given are that parol evidence may be admitted to prove that there was no acceptance or no consideration.16 Such evidence may be admitted to prove fraud, mistake, illegality, unconscionability, and other invalidating causes.17 It may be admitted to prove a condition precedent to the enforceability of a written contract.18 Allowing proof of these matters, however, does not involve exceptions because the so-called exceptions do not implicate the parol evidence rule at all. The parol evidence in these cases is being offered for the purpose of contesting whether an enforceable contract exists, not for the purpose of establishing its terms. The rule comes into play after we have decided that the parties have made an enforceable contract.19 The admissibility of formation

13Casa Herrera, 83 P.3d at 503–04.

14Berg v. Hudesman, 801 P.2d 222, 229 (Wash. 1990); Garza v. Marine Transport Lines, Inc., 861 F.2d 23, 27 (2d Cir. 1988); RESTATEMENT (SECOND) OF CONTRACTS § 214 (1981).

15See, e.g., Eric A. Posner, The Parol Evidence Rule, The Plain Meaning Rule, and the Principles of Contractual Interpretation, 146 U. PA. L. REV. 533, 534–35 (1998).

16See § 3.3.2.

17See § 3.3.2.1.

18See § 3.3.2.2.

19E.g., King v. Fordice, 776 S.W.2d 608, 611–12 (Tex.App. 1989). See also Mark K. Glasser & Keith A. Rowley, On Parol: The Construction and Interpretation of Written Agreements and the Role of Extrinsic Evidence in Contract Litigation, 49 BAYLOR L. REV. 657, 720 (1997).

and invalidating parol evidence is not an exception because the parol evidence rule does not apply in the first instance.

Third, the Restatement (Second) of Contracts [Restatement (Second)] provides, and most courts hold, that parol evidence may be admitted for the purpose of showing that an agreement is or is not integrated.20 Other courts determine whether a written agreement is integrated from the face of the document.21 The parol evidence rule often poses no barrier to addressing the question of integration in light of relevant parol evidence, such as evidence of the circumstances at the time of signing. Parol agreements should be distinguished from parol evidence; the latter may not amount to an agreement and therefore would not bind either party. The parol evidence rule applies to render parol agreements inoperative when they are offered to establish contract terms. Moreover, parol evidence offered on the question of integration is not being offered to establish contract terms.

Fourth, a court may admit parol evidence for the purpose of giving meaning(s) to the contract’s terms.22 Evidence offered for this purpose is not being offered to establish terms. So the parol evidence rule does not apply at all; giving meaning to a term is not an exception to the rule. This can be a point of confusion in the case law and elsewhere. Hence, it should be emphasized that the parol evidence rule is not the basis for excluding parol evidence whenever a court excludes such evidence. In determining whether the plain meaning rule applies (i.e., whether the contract is unambiguous), the four corners rule operates in many jurisdictions to preclude consideration of parol evidence. But the four corners rule is not the same as either the parol evidence or the plain meaning rules.23

Fifth, evidence of a subsequent written or oral agreement is parol evidence but will be admitted to show an agreement to modify a prior integrated contract.24 Such an agreement is not a prior oral or written agreement or a contemporaneous oral agreement but, instead, is a subsequent one. Similarly, the parties’ subsequent conduct is extrinsic to the document but may be effective as a practical construction to show

20RESTATEMENT (SECOND) OF CONTRACTS §§ 209, cmt. c, 210, cmt. b (1981).

21Gifford v. Gifford, 236 N.E.2d 892, 893 (Mass. 1968); Taylor v. More, 263 N.W. 537, 539 (Minn. 1935); Gianni v. R. Russel & Co., Inc., 126 A. 791, 792 (Pa. 1924).

22RESTATEMENT (SECOND) OF CONTRACTS § 214(c) (1981).

23See §§ 3.1.1; 4.2.1; 4.2.4.

24Material Movers, Inc. v. Hill, 316 N.W.2d 13, 17 (Minn. 1982); Indus. Nat’l Bank v. Peloso, 397 A.2d 1312, 1314 (R.I. 1979).

whether a document is integrated or to give meaning to an ambiguous term.25 Again, a practical construction is not a prior oral or written agreement or a contemporaneous oral agreement. Further, under the parol evidence rule in Article 2 of the Uniform Commercial Code (UCC), evidence of a course of performance, course of dealing, or usage of trade, though extrinsic to a writing, is not affected by the rule.26

Sixth, to fall under the parol evidence rule’s effect, a parol agreement must concern the same subject matter as the written contract. That is, it must be within the scope of the writing, considered as a whole.27 Collateral agreements—those that add to a partial integration or concern unrelated matters—can have operative effect despite the rule.28

Seventh, some courts add that a parol agreement may not “vary” or “change” the written terms.29 However, a variance or change would be either an addition or a contradiction. They are short-hand, less precise ways to say that a parol agreement cannot add to or contradict an integrated, written contract, as the case may be. The point is covered by the above statement of the rule.

Eighth, the rule does not operate when a party seeks reformation to correct a mistake.30 This is a genuine exception to the rule.

Ninth, the above statement of the rule does not use the term extrinsic evidence, though it is in common usage. This term may be defined as evidence relating to a written contract that does not appear within the four corners of the contract.31 It is a synonym for “parol evidence” and will be used from time to time in this book.

It should be apparent that the parol evidence rule is complex and difficult to state completely in brief. Accordingly, one should be wary of the courts’ short, incomplete boilerplate statements. Often, the courts will state the rule in a short sentence and then ignore it as stated. Or they may state only those parts of the rule that are dispositive in the case at hand. Consequently, one can be misled by parsing the words in such boilerplate closely. Nonetheless, a synthesis of the specific holdings in the cases supports the rule as articulated above. In the particular, however,

25J&B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 642 N.E.2d 1215, 1219 (Ill. 1994).

26UCC § 2-202 (2001).

27Alstom Power, 849 A.2d at 811. See § 3.3.1.

28Mitchill v. Lath, 160 N.E. 646, 647 (N.Y. 1928).

29E.g., First Data POS, Inc. v. Willis, 546 S.E.2d 781, 784 (Ga. 2001).

30See § 3.3.2.3.

31BLACK’S LAW DICTIONARY 578 (Bryant A. Gardner, ed., 7th ed. 1999).